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July 1 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says BNP Paribas’s settlement with US authorities has no immediate effect on the bank’s ratings (A+/Stable/a+). The settlement includes the payment of a USD9bn fine and a guilty plea by the parent bank. Under the terms of the settlement, BNP Paribas will not be able to clear USD transactions related to the bank’s oil and gas commodity finance business in certain locations throughout 2015.
We consider the settlement a setback for the group, but we do not expect its franchise to suffer lasting damage as a result of it. After netting legal provisions of USD1.1bn, the additional USD7.9bn charge for the fine will result in a 2Q14 pre-tax loss for the bank. Nevertheless, according to BNP Paribas, its fully-applied Basel III common equity tier 1 (CET1) ratio remained at around 10% at end-June 2014, which Fitch considers to be in line with the bank’s ratings. BNP Paribas’s ability to absorb the fine highlights the benefits of the bank’s robust earnings generation from diversified businesses, which underpins its Viability Rating of ‘a+'. BNP Paribas announced that the underlying net performance in 2Q14 was solid. The bank’s CET1 ratio also benefited from a reduction in cash dividend accruals in the quarter to EUR1.50 per share from EUR2.00.
We do not expect the guilty plea to result in licence withdrawals, based on comments made by the French banking supervisor, the Autorite de Controle Prudentiel. According to the bank, this has also been confirmed by the US Federal Reserve (Fed) and the New York State Department of Financial Services (DFS).
The bank has accepted a temporary suspension of clearing USD payments for oil and gas- related transactions originated in certain of its French, Swiss, Italian and Singaporean offices. In addition, the bank will prohibit all USD clearing as a correspondent bank for unaffiliated third-party banks in New York and London for two years.
The timing of these restrictions should give the bank time to put in place alternative arrangements. We expect the bank to enter into a commercial agreement with a third-party US bank for the USD clearing of these transactions and believe that this should not result in a material curtailment or disruption of its operations or in a franchise loss in its trade finance business. BNP Paribas’s oil and gas, energy and commodities financing business generated a moderate 1% of the bank’s 2013 net revenue.
BNP Paribas has a strong franchise in international trade finance, where transactions are primarily USD-denominated. Nevertheless, the bank’s overall USD funding requirements are moderate, and it does not rely on short-term USD wholesale funding. The bank maintains sizeable liquidity reserves. At end-March 2014, the bank had EUR100bn in excess stable funding, of which around half was in USD, and according to the bank the amount of excess funding was largely unchanged at end-June 2014.
Although we do not expect a material franchise loss, customer reactions to the guilty plea are difficult to predict. We would consider reviewing and potentially downgrading BNP Paribas’s ratings if it suffers a material franchise loss as a result of the settlement, which we currently do not expect, or if the bank is unable to maintain capitalisation in line with peers.
BNP Paribas’s settlement concerns pending procedures for transactions with counterparties in Cuba, Iran and the Sudan, which violated US law. As part of the settlement, the ACPR and the Fed issued a joint cease and desist order, under which BNP Paribas is required to strengthen its compliance with US sanction laws. The bank has worked on improving its compliance and controls and will establish an expanded compliance function in the US, where all USD flows for the group will ultimately be processed and controlled in the future.